Year-End Report 1998

Fri, Jan 29, 1999 09:11 CET

Year-End Report 1998
SCA in Brief
1998 1997
Net sales, SEK M 61,273 58,595
Earnings after financial items, SEK M 5,169 4,457
Debt/equity ratio, times 0.72 0.73
Earnings per share after tax, SEK 17.07 13.98
Cash flow from operations per share, SEK 21.56 24.54
Dividend, SEK 6.50* 5.75
* Board proposal
* Continued stable earnings growth during the fourth quarter, despite
significant production shortfall in liner operations due to rebuilding
shutdowns.
* Earnings per share rose 22% compared with 1997.
* Cash flow goals for the year were fulfilled.
* Board of Directors proposes a dividend of SEK 6.50 (5.75) for 1998. If
approved, dividend growth over the past five years will amount to 14%
annually.
* The Group's strategic capital investments amounted to SEK 5,041 M in 1998,
where SEK 3,154 M was attributable to Hygiene Products and SEK 1,393 M to
Packaging.
* Development in 1999 is difficult to assess, but the relative stability of
economic growth in Europe and the U.S. provides some cause for optimism.
Appended to this year-end report is the "President's Letter" (extract from
the main content of the President's Letter in the SCA 1998 Annual Report).
NET SALES AND EARNINGS
The Group's net sales amounted to SEK 61,273 M (58,595), an increase of 5%
compared with 1997. Adjusted for divestments, the increase was 8%. The
improvement is attributable to favorable effects of higher prices, 1%, a net
volume increase of 4% and positive currency effects of 3%. Compared with the
third quarter of 1998, net sales rose 4% in the fourth quarter due to higher
sales in all business areas.
Group operating profit improved 15% to SEK 6,428 M (5,568). The reported
operating profit includes capital gains of SEK 400 M (425).
Financial items amounted to an expense of SEK 1,259 M (1,111). The change is
attributed mainly to higher net debt.
Group earnings after financial items rose 16% to SEK 5,169 M (4,457).
Excluding nonrecurring items, the increase was 18%. Foreign exchange movements
affected earnings positively with approximately SEK 270 M, attributable to
Graphic Paper's revenues on exports from Sweden.
Net earnings after tax amounted to SEK 3,379 M (2,759). Earnings per share
after full tax and full dilution improved 22% to SEK 17.07 (13.98).
Return on shareholders' equity was 13% (12) and return on capital employed was
14% (12).
CASH FLOW
SEK M 9812 9712
Net sales 61,273 58,595
Operating surplus 10,320 9,344
% of net sales 17 16
Current capital expenditures -2,058 -2,207
% of net sales 3 4
Changes in working capital -932 -533
Other operating cash flow changes -360 -91
Operating cash flow 6,970 6,513
Income taxes paid, etc¹ -1,694 -1,064
Free cash flow 5,276 5,449
per share, SEK 26.61 27.57
Interest paid after taxes -1,001 -599
Cash flow from current operations 4,275 4,850
per share, SEK 21.57 24.54
Strategic capital investments, net -3,930 -4,368
per share, SEK -19.82 -22.10
Cash flow before dividend 345 482
per share, SEK 1.74 2.44
¹ Tax attributable to operating profit
Operating surplus improved to SEK 10,320 M (9,344), corresponding to 17% (16)
of net sales.
Operating cash flow amounted to SEK 6,970 M (6,513). An increase in working
capital reduced cash flow by SEK 932 M (553). The increase was due mainly to
strong volume growth. Current capital expenditures amounted to SEK 2,058 M
(2,207).
Cash flow from current operations, defined as cash flow before strategic
capital investments and dividends, amounted to SEK 4,275 M (4,850), or SEK
21.57 (24.54) per share. Cash flow for the year exceeded the Group's long-term
goal of SEK 3,200 M by a broad margin. The short-term objective for the year,
which totaled SEK 4,900, excluding increases in working capital, was also
surpassed.
Strategic capital investments, that is, expansion investments and
acquisitions, amounted to SEK 5,041 M (4,414). Acquisitions totaled SEK 2,793
M (3,431), including the purchase of additional shares in PWA (96% at year-
end), redemption of minority interests in Laarkirchen, the acquisitions of the
Spanish tissue company Marpo and a minority holding (25%) in Lantero, a
Spanish packaging company, the acquisition of a tissue company in the
Philippines and the Russian tissue company Svetogorsk Tissue, an increase in
SCA's ownership share in Productos Familia of Colombia to 50%, the acquisition
of 33% of the shares in the Czech packaging company Obalex and all shares
outstanding in Widmer-Walty Group, a Swiss packaging company. Previously
announced plans to acquire shares in the Brazilian tissue company
Melhoramentos have not been completed due to the country's financial crisis.
Strategic capital expenditures in plant and machinery totaled SEK 2,248 M,
with Hygiene Products accounting for SEK 1,617 M and Packaging for SEK 512 M.
Projects in Hygiene Products include a new tissue production line in Mannheim,
expanded conversion capacity for tissue, new capacity for incontinence
products and the introduction of a new production technique for baby diapers.
Ongoing projects in the Packaging business area include rebuilding and new
construction in Obbola and Witzenhausen and new conversion technology for
corrugated board at several production plants.
Divestments, which amounted to SEK 1,111 M (46), consisted mainly of the sale
of Mölnlycke's Clinical Products Division.
NET DEBT AND DEBT/EQUITY RATIO
Net debt at year-end amounted to SEK 21,370 M, which is SEK 2,352 M higher
than at 1 January 1998. Of the increase, SEK 1,227 M is attributed to effects
of the weaker Swedish krona.
As a result of the weaker Swedish krona, shareholders' equity rose by
approximately SEK 1,400 M. SCA's policy to hedge the Group's net assets
outside Sweden is based on the principle that the debt/equity ratio should not
be affected by foreign exchange rate movements.
The reported debt/equity ratio was 0.72 (0.73), with an interest coverage
ratio of 5.1 times (5.0).
SIGNIFICANT EVENTS DURING THE FOURTH QUARTER 1998
AND THE BEGINNING OF 1999
The Hygiene Products business area increased its ownership interest to 50% in
Productos Familia, which, in turn, has acquired all shares in Tecnopapel, a
tissue company in Ecuador.
The Packaging business area acquired all shares outstanding in the Widmer-
Walty Group of Switzerland. Toward year-end, Packaging also acquired the
corrugated board operations of the British company Rexam for GBP 195 M. The
acquisition will increase SCA's market share in Great Britain from 13% to 21%.
The transaction was approved at Rexam's Special General Meeting and approval
by EU's competition commission is expected in February 1999.
DIVIDEND
The Board of Directors has proposed a dividend of SEK 6.50 (5.75) per share,
an increase of 13%. If approved, the dividend will amount to 4.9% of
shareholders' equity's book value. Dividend growth during the past five years,
accordingly, amounts to 14% annually.
HYGIENE PRODUCTS BUSINESS AREA
SEK M 98:4 98:3 98:2 98:1 9812 9712
Net sales 6,951 6,490 6,395 6,328 26,164 24,018
Operating profit 583 600 605 616 2,404 2,567
Volume growth %
Tissue products 9* 2* 0* 15**
Fluff products 1* 4* 5* 8**
*) Compared with the immediately preceding quarter
**) Compared with 9712
Net sales in 1998 totaled SEK 26,164 M (24,018), an increase of 9% compared
with the preceding year. The increase represents net effects of 11% volume
growth, lower prices and changes in the product mix. Changes in currency rates
yielded a positive effect on sales of slightly more than 3%.
Operating profit amounted to SEK 2,404 M (2,567). The decline was caused by
lower product prices, increased expenses for new product launches and higher
research and development expenditures. Operating profit benefited from the
strong volume growth, however. Lower earnings were reported for tissue and
incontinence products, while baby diapers and feminine hygiene products showed
improved earnings. Currency movements had no effects on operating profit.
Compared with the third quarter, earnings declined marginally in the fourth
quarter due to somewhat weaker earnings in the institutional tissue segment
and some conversion costs incurred in conjunction with ongoing investments and
structural changes. Other product segments reported unchanged or higher
earnings.
PACKAGING BUSINESS AREA
SEK M 98:4 98:3 98:2 98:1 9812 9712
Net sales 3,832 3,725 3,650 3,828 15,035 14,282
Operating profit 316 396 395 373 1,480 1,196
Deliveries m sq. m.
Corrugated board 704 703 724 728 2,859 2,784
Production and deliveries, liner products, see table "Volumes" on page 14.
Net sales during the year totaled SEK 15,035 M (14,282). Accordingly, sales
rose slightly more than 5%, with half of the increase attributable equally to
higher prices and volume improvements and half to currency effects.
Operating profit amounted to SEK 1,480 M (1,196). The increase was due to
higher prices, lower raw material costs and productivity improvements.
Currency movements had marginally negative effects on earnings.
The decline in fourth-quarter earnings compared to the third quarter was due
to production shutdowns in Obbola and Witzenhausen for rebuilding projects. In
addition, kraftliner prices continued to decline in parallel with some price
pressure on corrugated board products.
GRAPHIC PAPER BUSINESS AREA
SEK M 98:4 98:3 98:2 98:1 9812 9712
Net sales 4,959 4,779 4,491 4,673 18,902 16,562
Operating profit 469 492 425 465 1,851 884
Wood-containing 380 358 317 279 1,334 458
publication papers
Fine papers, paper merchanting, 89 134 108 186 517 426
market pulp
Production and deliveries, see table "Volumes" on page 14.
Net sales in 1998 totaled SEK 18,902 M (16,562), an increase of 14%. The
improvement was equally attributable to higher deliveries, higher prices and
currency effects.
Operating profit for the year amounted to SEK 1,851 M (884). The earnings
improvement in wood-containing publication papers was based mainly on higher
prices, but increased volume deliveries, lower raw material costs, favorable
currency movements and productivity improvements also contributed to the
increase. The improvement in earnings from fine papers and pulp was
attributable to higher prices and productivity improvements. Deliveries of
fine papers were unchanged compared with the preceding year.
Compared with the third quarter of 1998, higher deliveries were the main
factor behind improved fourth-quarter earnings for wood-containing publication
papers.
Fourth-quarter prices for fine papers declined compared with the third
quarter, and deliveries were slightly lower. The decline in earnings was
limited by lower pulp prices. Pulp operations, however, showed a sharp decline
in fourth-quarter earnings, compared with the third quarter.
FOREST AND TIMBER
SEK M 98:4 98:3 98:2 98:1 9812 9712
Net sales 998 901 1,033 1,053 3,985 4,158
Operating profit 206 140 188 188 722 812
Earnings in 1998 were down 11%, compared with 1997. Earnings for the year
include capital gains of SEK 32 M (8) from the sale of forest land. Sawmill
operations reported a sharp decline in earnings compared with 1997, due mainly
to lower prices and higher raw material costs. Fourth-quarter earnings from
sawmill operations were unchanged, compared with the third quarter, while
forestry operations reported a sharp increase in earnings.
PERSONNEL
The number of employees at year-end 1998 was 32,211 (33,404).
MARKET OUTLOOK
Development in 1999 is difficult to assess, but the relative stability of
economic growth in Europe and the U.S. provides some cause for optimism.
Volume growth for SCA products in 1998 was strong while price pressure in
virtually all areas occured. Competitive pricing was also noted for both raw
materials and finished products. Raw materials, however, were also affected by
surplus supply caused by the financial crises in Asia and Latin America, while
price pressure on finished products was caused by low inflation and
competition in Europe.
Prices for hygiene products at year-end 1998 were 3% lower than average prices
for the year. Pulp prices also declined, which compensated for most effects of
lower prices for finished products during the fourth quarter. Internal
programs to improve productivity will be intensified in 1999 and are expected
to gradually improve margins by 2 percentage points over the next two years.
Demand is expected to remain strong, and determined efforts will be made to
restore higher prices.
The Packaging business area shows continued good demand. Corrugated board
prices are relatively stable, but prices for both kraftliner and testliner
declined toward year-end and, in the beginning of 1999, were about 5% below
average prices in 1998. An increase of 15% in the price of kraftliner has been
announced by North American producers. Conditions for a price increase in
Europe during the second quarter are considered good.
Within the Graphic Paper business area, prices for newsprint and SC paper are
expected to remain stable. The price of LWC paper in the beginning of 1999 was
about 3% below the average price in 1998. Demand for coated fine papers in
sheets is strong, but prices in the beginning of 1999 were about 5% below
average prices in 1998. Pulp prices appear to have hit bottom.
SHARE DISTRIBUTION
981231 Series A Series B Total
Registered number of shares 62,145,880 135,254,055 197,399,935
Unconverted debenture loans - 1,313,151 1,313,151
Outstanding warrants - 1,643,544 1,643,544
Total after full conversion 62,145,880 138,210,750 200,356,630
Calculated in accordance with recommendations by the Swedish Association of
Financial Analysts, the effects of outstanding debentures and warrants
represent a maximum dilution of 0.7%, which is taken into account in
calculating earnings per share for the period.
ANNUAL GENERAL MEETING
The Annual General Meeting of shareholders will be held on 24 March 1999 in
Stockholm. The proposed record date for entitlement to dividends is 29 March.
Payment is expected to be made through VPC (Swedish Securities Register
Center) on 7 April. Interim reports in 1999 will be released on 28 April, 29
July and 28 October. The Annual Report for 1998 is expected to be published in
the beginning of March 1999.
Stockholm, 29 January 1999
SVENSKA CELLULOSA AKTIEBOLAGET SCA (publ)
Sverker Martin-Löf
President and CEO
This report has not been subject to final audit by the company's auditors.
Copies of the Interim Report are available at SCA U.K. Holdings Limited, SCA
Packaging House, 543,
New Hythe Lane, Aylesford, Kent ME20 7PE, attention, Tony Staples, telephone
+44 1622 883 025
Statement of Earnings
1 January - 31 December
1998 1997
SEK M ECU M SEK M ECU M
Net sales 61,273 6,858 58,595 6,794
Operating expenses -50,953 -5,703 -49,251 -5,710
Operating surplus 10,320 1,155 9,344 1,084
Depreciation according to plan -4,013 -449 -3,843 -446
Share in earnings of associated companies 121 13 67 8
Operating profit 6,428 719 5,568 646
Financial items -1,259 -141 -1,111 -129
Earnings after financial items 5,169 578 4,457 517
Income taxes -1,680 -188 -1,337 -155
Minority interest -110 -12 -361 -42
Net earnings after tax 3,379 378 2,759 320
Operating margin 11 % 10 %
Return on shareholders' equity 13 % 12 %
Return on capital employed 14 % 12 %
Business Areas
Net sales
1 January - 31 December
SEK M 1998 1997
Hygiene Products 26,164 24,018
Packaging 15,035 14,282
Graphic Paper 18,902 16,562
Wood-containing publication papers 7,478 6,390
Fine papers, paper merchanting, market pulp 11,424 10,172
Forest and Timber 3,985 4,158
Other operations 1,647 1,862
Divested units 144 1,804
Intra-Group deliveries -4,604 -4,091
Total net sales 61,273 58,595
Earnings
1 January - 31 December
SEK M 1998 1997
Hygiene Products 2,404 2,567
Packaging 1,480 1,196
Graphic Paper 1,851 884
Wood-containing publication papers 1,334 458
Fine papers, paper merchanting, market pulp 517 426
Forest and Timber 722 812
Other operations 285 384
Divested units 3 29
Goodwill amortization -317 -304
Total operating profit 6,428 5,568
Financial items -1,259 -1,111
Earnings after financial items 5,169 4,457
Balance Sheet
1998-12-31 1997-12-31
SEK M ECU M SEK M ECU M
Assets
Long-term assets 55,147 5,823 50,351 5,787
Receivables and inventories 18,790 1,984 16,726 1,923
Financial receivables and investments 2,617 276 2,046 235
Cash and bank balances 1,819 192 1,582 181
Total assets 78,373 8,275 70,705 8,126
Equity, provisions and liabilities
Shareholders' equity 28,404 2,999 24,653 2,833
Minority interest 1,386 146 1,496 172
Provisions 10,906 1,152 10,452 1,201
Interest-bearing liabilities 25,806 2,725 22,647 2,603
Operating liabilities and 11,871 1,253 11,457 1,317
other noninterest-bearing debt
Total equity, provisions and liabilities 78,373 8,275 70,705 8,126
Debt/equity 0.72 times 0.73 times
Equity/assets 38 % 37 %
Cash Flow Statement
1 January - 31 December
SEK M 1998 1997
Operating surplus 10,320 9,344
Changes in working capital -932 -533
Current capital expenditures -2,058 -2,207
Other operating cash flow changes -360 -91
Operating cash flow 6,970 6,513
Financial items -1,259 -1,111
Income taxes paid -1,279 -731
Other -157 179
Cash flow from current operations 4,275 4,850
Strategic capital expenditures -2,248 -983
Acquisitions -2,793 -3,431
Divestments 1,111 46
Cash flow before dividend 345 482
Dividend -1,145 -1,092
Net cash flow -800 -610
Net debt, 1 January -19,018 -17,462
Net cash flow -800 -610
Net debt in acquired operations -325 -
Currency effects -1,227 -946
Net debt, 31 December -21,370 -19,018
Debt payment capacity 37 % 39 %
Debt payment capacity
Debt payment capacity is expressed as cash earnings in relation to net debt.
Cash earnings
Cash earnings are calculated as earnings before tax with reversal of
depreciation on tangible and intangible assets, share in earnings of
associated companies, nonrecurring items and deductions for income taxes paid.
Quarterly Data
Group
1998 1997
SEK M IV III II I IV III II I
Net sales 15,918 15,234 14,857 15,264 15,003 14,262 15,114 14,216
Operating surplus 2,476 2,506 2,427 2,911 2,381 2,244 2,645 2,074
Depreciation -1,043 -1,006 -966 -998 -924 -958 -1,009 -952
according to plan
Share in earnings 27 32 41 21 45 8 7 7
of associated
companies
Operating profit 1,460 1,532 1,502 1,934 1,502 1,294 1,643 1,129
Financial items -343 -338 -298 -280 -307 -285 -284 -235
Earnings after 1,117 1,194 1,204 1,654 1,195 1,009 1,359 894
financial items
Of which, - - - 400 - - 300 125
nonrecurring items
Income taxes -356 -426 -376 -522 -391 -351 -300 -295
Minority interest -30 -19 -29 -32 -120 -88 -71 -82
Net earnings after 731 749 799 1,100 684 570 988 517
tax
Earnings per share 3.68 3.77 4.05 5.57 3.47 2.89 5.00 2.62
Quarterly Data
Business Areas - Net sales
1998 1997
SEK M IV III II I IV III II I
Hygiene Products 6,951 6,490 6,395 6,328 6,090 5,922 6,015 5,991
Packaging 3,832 3,725 3,650 3,828 3,519 3,465 3,975 3,323
Graphic Paper 4,959 4,779 4,491 4,673 4,341 4,108 4,174 3,939
Wood-containing 1,979 1,900 1,761 1,838 1,856 1,540 1,655 1,339
publication papers
Fine papers, 2,980 2,879 2,730 2,835 2,485 2,568 2,519 2,600
paper merchanting,
market pulp
Forest and Timber 998 901 1,033 1,053 1,118 903 1,081 1,056
Other operations 365 467 404 411 463 427 511 461
Divested units 3 1 -1 141 466 427 466 445
Intra-Group -1,190 -1,129 -1,115 -1,170 -994 -990 -1,108 -999
deliveries
Total net sales 15,918 15,234 14,857 15,264 15,003 14,262 15,114 14,216
Business Areas - Earnings
1998 1997
SEK M IV III II I IV III II I
Hygiene Products 583 600 605 616 595 645 647 680
Packaging 316 396 395 373 336 291 376 193
Graphic Paper 469 492 425 465 436 210 173 65
Wood-containing 380 358 317 279 193 102 128 35
publication papers
Fine papers, paper 89 134 108 186 243 108 45 30
merchanting,
market pulp
Forest and Timber 206 140 188 188 221 208 230 153
Other operations -30 -16 -34 365 -13 7 283 107
Divested units -1 -1 - 5 3 9 11 6
Goodwill amortization -83 -79 -77 -78 -76 -76 -77 -75
Total operating profit 1,460 1,532 1,502 1,934 1,502 1,294 1,643 1,129
Financial items -343 -338 -298 -280 -307 -285 -284 -235
Earnings after financial 1,117 1,194 1,204 1,654 1,195 1,009 1,359 894
items
of which, nonrecurring - - - 400 - - 300 125
items
Earnings after financial
items 1,117 1,194 1,204 1,254 1,195 1,009 1,059 769
Excl. nonrecurring items
Quarterly Data
Business Areas - Margins
1998 1997
Percent IV III II I IV III II I
Hygiene Products 8 9 9 10 10 11 11 11
Packaging 8 11 11 10 10 8 9 6
Graphic Paper 9 10 9 10 10 5 4 2
Wood-containing 19 19 18 15 10 7 8 3
publication papers
Fine papers, paper 3 5 4 7 10 4 2 1
merchanting,
market pulp
Forest and Timber 21 16 18 18 20 23 21 14
Group
Operating margin 9.2 10.1 10.1 12.7 10.0 9.1 10.9 7.9
Financial net margin -2.2 -2.2 -2.0 -1.8 -2.0-2.0 -1.9 -1.7
Profit margin 7.0 7.9 8.1 10.9 8.0 7.1 9.0 6.2
Five-year summary
Full year 1998 1997 1996 1995 1994
Earnings after financial items, SEK M 5,169 4,457 3,573 5,731 1,060
Earnings per share after tax, SEK 17.07 13.98 10.71 17.55 2.94
Debt/equity ratio, times 0.72 0.73 0.67 0.69 0.52
Return on capital employed, % 14 12 11 16 6
Return on shareholders' equity, % 13 12 10 17 3
Volumes
Thousand metric tons 98:4 98:3 98:2 98:1 9812 9712Change %
Liner products
Production 497 562 555 554 2,168 2,241 -3
External deliveries 173 183 173 186 715 704 2
Wood-containing publication
papers
Production 295 301 303 301 1,200 1,127 6
External deliveries 311 300 300 288 1,199 1,135 6
Fine papers
Production 179 190 183 184 736 715 3
External deliveries 182 193 164 181 720 718 0
President's letter
(Extract from the main content of the President's Letter in the SCA 1998
Annual Report).
INCREASED PROFITABILITY AND EXPANSION
For SCA, 1998 was a year of both consolidation and expanded operations.
The merger during the year of the Group's hygiene products operations in a
single business area and the measures taken to improve profitability in the
corrugated board business were significant steps toward greater
competitiveness. We also experienced a high rate of expansion in the Hygiene
Products and Packaging business areas both through acquisitions and direct
investments. Meanwhile, the rationalization of the Graphic Paper and
industrial forestry operations continued. Product development has been
assigned an increasingly prominent role in all sectors of operations, which
has helped to strengthen the Group's market positions.
International growth was dampened by the financial crises. But the impact on
SCA's operations has been limited up to now. Our product portfolio provides
effective protection against the fluctuations that have occurred, primarily in
the raw-materials market.
The Group's net sales in 1998 amounted to SEK 61,273 M and income after
financial items was SEK 5,169 M. The trend of earnings was distinctly positive
in Packaging and Graphic Paper - notably in the case of publication papers.
Hygiene Products met its yield targets despite pressure on prices in European
markets.
The growth in volume for the Group as a whole amounted to 8 percent. Growth in
the Hygiene Products sector amounted to a full 11 percent. The Group's
operating surplus increased by 10 percent, exceeding the target figure of a
16-percent margin. The cash flow from operations amounted to SEK 4,275 M,
clearly exceeding the long-term goal of SEK 3,200 M. Expansion investments
amounted to SEK 5,041 M.
SCA share
The SCA share performed much better than the Stockholm Stock Exchange's Forest
Index in 1998.
The long-term trend is shown in the chart, where the annual effective return
on an investment in the SCA share since 1980 (based on the average share
prices for the year) is shown for each year. As the chart shows, the return
between 1997 and 1998 was 15 percent. The average return for the entire period
was 15 percent and the return for the most recent five-year period 17 percent.
Thus, SCA has created value for its shareholders well within the range
anticipated in our objectives.
Increased profitability and expansion
Our strategy for the Hygiene Products and Packaging business areas is to
increase the profitability of existing operations and to expand through
acquisitions. Accordingly, active participation in the ongoing consolidation
of our industry in Europe, and expansion in such new markets as Central and
Eastern Europe, Asia and Latin America have the highest priority.
A new, integrated operation was created in the hygiene sector through the
merger of SCA Hygiene Paper and SCA Mölnlycke. The new organization gives us
better opportunities to deal with the competition in Europe since we are
better able to utilize the effects of synergies in production, distribution,
product development and marketing. The network of strategic facilities that is
being built up in the production field in Europe, in which each mill is
concentrating its production on specific products - thereby making it possible
to significantly improve efficiency - constitutes an important project. In
Mannheim, we began installation during the year of a completely new production
line for high-grade tissue to be sold in retail outlets under private labels.
Production is scheduled to start during the summer of 1999.
The incontinence-care business continues to show strong growth in volume.
Among other developments, SCA's positions in France and Finland were
strengthened through acquisitions. Pant diapers for use in incontinence-care
were launched in Europe. Products for light incontinence problems were
introduced in the Italian and Spanish markets. We also began to sell
incontinence products under our Tena brand in Mexico and a number of other
Latin American countries.
The Svetogorsk tissue mill in Russia was acquired and SCA's holding in
Productos Familia, the Colombian tissue company, was increased to 50 percent.
The financial problems that have affected these regions are slowing the pace
of SCA's operations in the short-term perspective but few observers question
the strong potential growth in consumption over a somewhat longer term. Our
operations in the regions are still limited. 3 percent of our total sales and
2 percent of our capital are in Russian, Asian and Latin American markets.
SCA's Packaging sector has been actively engaged in a program to boost
profitability in its present business. Briefly stated, the program is based on
efforts throughout the business area to maximize sales margins by focusing on
market segments with more sophisticated customer requirements, rather than by
attempting to maximize volumes. In Germany, which is SCA's largest market for
packaging, the action program is being carried out at the same time that costs
are being reduced sharply, in part through cutbacks in personnel.
Meanwhile, SCA Packaging strengthened its positions in both Western and
Central Europe through acquisitions that increased the business area's sales
by SEK 900 M (or 6 percent). Just before the end of the year an agreement was
reached with Rexam Plc covering the acquisition of the latter's packaging
operations in the corrugated board field. This will strengthen SCA's already
leading position in the Great Britain, increasing its share of that market
from 13 to 21 percent, at the same time that attractive new segments are being
opened up. The acquisition is in line with the strategy of participating
actively in consolidation of the industry and increasing the Group's present
total share of the market in Europe to 20 percent.
The work in SCA's forest products sector, which includes the Graphic Paper and
Forest and Timber units, was focused on continuing fine-tuning measures. With
very limited capital expenditures, SCA is implementing improvement and
rationalization programs that have resulted in a substantial increase in
earnings in the fine-paper segment, in recapturing the Group's position as the
leading producer of SC paper, in continuing fine-tuning of LWC paper
production, and in sharp improvements in operations of our sawmills in
Munksund, Tunadal and Lugnvik.
Importance of raw materials
The proximity to high-grade raw materials - our own forest holdings - is a
critical factor in all of SCA's operations. The Hygiene Products, Packaging
and Graphic Paper business areas are extremely dependent on cost-effective
production of both pulp and paper products. The nearby forest raw material is
an important element in our cost situation and our emphasis on quality. The
chart shows that income generated in the Swedish forest products sector is of
major importance in determining the level of Group earnings. The consistent
level of earnings in forest product operations are striking, while earnings in
the paper and pulp operations vary sharply from year to year. However, the
semifinished products from the latter operations are processed in the hygiene
and packaging business areas.
SCA's employees - key to success
SCA's strategic focus imposes heavy demands on skilled and involved employees
in all Group operations. Growth in value in the company is ultimately being
created by all the employees, who should be able to share that growth. In 1998
all employees in ten countries were offered an opportunity to subscribe for
convertible debentures and attached warrants as a way of becoming part-owners
of SCA. Forty-two percent of the employees - 12,000 persons - subscribed. I
consider this to be a high percentage in a company like SCA which, as a result
of acquisitions, is continuously acquiring a large number of employees who
initially do not often know the company so well.
A new incentive system that is linked to SCA's cash-flow requirements and
growth in value was offered to approximately 60 executives. The system is
based on long-term growth in value of SCA shares relative to those of
comparable companies, and on SCA's cash-flow objectives. We plan to develop
this type of value-based bonus system to include all employees at all levels,
which I believe will stimulate all of us in our daily work.
SCA - a part of Europe
Sweden and Swedish industry and commerce need a Swedish connection with the
European Monetary Union. This is an important prerequisite for our continuing
investments at home.
The greater part of SCA's operations and employees are in "EMU countries." For
a company whose operations cover nearly all of Europe, but which is based in
Sweden, Swedish membership in the EMU is highly desirable to facilitate
trading in our shares and to create equal conditions for investors in
different countries.
Environment
The environmental program is a priority, fully integrated part of SCA's
operations. This is because our business concept places strong emphasis on the
closed-cycle principle, which is natural since more than 90 percent of the
company's products consist of renewable and recyclable materials. Envi-
ronmental considerations are always involved at an early stage of decisions
pertaining to development of new products or production processes.
SCA is working actively to obtain environmental certification of Group
operations. Forestry operations were certified via the Forest Stewardship
Council and ISO 14001. Before the end of the year 2000, all of the pulp and
paper mills will be environmentally certified in accordance with the European
and international ISO 14001 and EMAS standards.
Year 2000 problem
Ensuring that our data processing systems will function in the year 2000 has
been a priority concern for some time. Our production facilities are highly
modern and thus contain, in addition to EDP systems, a number of computer
systems that control processes. Using systematic methods and checking
programs, as well as independent audits, all systems are being aligned with
the aim of ensuring that they will function during the shift to the new
millennium.
Cash flow and dividend growth
Our operations are always keyed to the objective of giving our shareholders a
competitive return on their investment. The strategy for creating growth in
value is based on being able to use the cash flow from operations for
dividends and for profitable strategic investments. These investments in turn
create a growing cash flow that strengthens the base for consistent growth in
dividends.
In conjunction with the Board's strategy review of the Group, the Board
concluded that the current Group structure and earnings capacity suppports a
somewhat higher dividend level in 1998 in relation to reported shareholders'
equity. The Board has proposed an increase in the dividend for 1998 of 13
percent.
Since the company was listed on the Stockholm Stock Exchange in 1950, SCA's
dividend has been raised continuously or kept unchanged. Growth in the
dividend during the most recent five-year period, including the dividend
proposed for 1998, has amounted to 14 percent. The dividend today is equal to
approximately 4.9 percent of the shareholders' equity's book value.
Stockholm, 29 January 1999
Sverker Martin-Löf
President and Chief Executive Officer
The diagram illustrates the annual effective return, through 1998, based on
the date of acquisition of the SCA share. For example, if the SCA shares were
purchased in 1996, the effective return through 1998 amounted to 25%.
Effective return is defined as the share's appreciation in value and the
annual dividend being continually reinvested in SCA shares. The horizontal
lines show that the average over the entire period is 15% and 17% for the past
five years.
The forest operations are of major importance for SCA's cost position and
quality focus. The stable earnings level of the forest operations over time is
also a counterweight to the varying earnings of the industrial operations in
Sweden, particularly within Packaging and Graphic Paper.
3
------------------------------------------------------------
Please visit http://www.bit.se for further information
The following files are available for download:
http://www.bit.se/bitonline/1999/01/29/19990129BIT00010/bit0001.doc
http://www.bit.se/bitonline/1999/01/29/19990129BIT00010/bit0002.pdf

About Us

The core of SCA’s business is the forest, 2.6 million hectares in northern Sweden. Around this unique resource, we have built a well-developed value chain based on renewable raw material from our own and others’ forests. We offer paper for packaging and print, pulp, wood products, renewable energy, services for forest owners and efficient transport solutions. 2017 the forest products company SCA had approximately 4,000 employees and sales amounted to approximately SEK 1617 bn (EUR 1,6 bn). SCA was founded in 1929 and has its headquarters in Sundsvall, Sweden. More information at www.sca.com.